InfuSystem Holdings, Inc.
Q1 2017 Earnings Call Transcript

Published: 9 Aug 2017

[Operator:]

Good afternoon, everyone and welcome to the InfuSystem Holdings Q2, 2017 Conference Call. This is your operator, Victoria. And at this time, I would like to turn the call over to Joe Dorame. Joe, you may begin.

[Joe Dorame:]

Thank you. Good afternoon and thank you for joining us today to review the financial results of InfuSystem Holdings for the second quarter of 2017, which ended on June 30, 2017. As the operator indicated by name is Joe Dorame, I’m Lytham Partners and we are the Investor Relations Consulting Front Board InfuSystem. With us today representing the company are Gregg Lehman, Executive Chairman and Chris Downs Interim CFO. After the conclusion of today’s prepared remarks, we’ll open the call for a question-and-answer session. If anyone participating on today’s call does not have the full text copy of the press release, you can retrieve it from the company’s website at infusystem.com or numerous other financial websites. Before we get with prepared remarks, I would like to remind everyone certain statements made by the management of InfuSystem during this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Except for the statements as historical fact this conference call may contain forward-looking statements that involve risk and uncertainties some of which are detailed under risk factors in documents filed by the company with the United States Securities and Exchange Commission, including the Annual Report on Form-10K, for the year ended December 31, 2016. Forward-looking statements speaks only as of the date the statements were made, the company can give no assurance of such forward-looking statements will prove to be correct. InfuSystem does not undertake and specifically disclaims any obligation to update forward-looking statements whether as a result of new information, future events or otherwise. Now, I’d like to turn the call over to Gregg Lehman, Executive Chairman of InfuSystem. Gregg?

[Gregg Lehman:]

Thank you, Joe. Good afternoon to all of you joining us today’s call. Thank you for your interest in InfuSystem Holdings, we appreciate you’re taking time to learn more about the company. I am joined on today’s call by Chris Downs our Interim Chief Financial Officer, Trent Smith, Chief Accounting Officer; Jan Skonieczny our Executive VP of Operations and Rich Dilorio who heads up on Oncology Sales Group will join us for the Q&A section of the call. As you all know InfuSystem went through a management change during the just completed quarter. This is my first participation on the quarterly financial results conference call as a Member of the Office of the President that was established in May 2017. The rationale for the Office of the President is to refocus the company on the fundamentals; the basic blocking and tackling of operating our business. The InfuSystem business has been around for more than 30 years and the basics of our operations are fairly simply; we rent infusion pumps used in medical procedures and bill either the medical facilities or the patients third party insurance provider. Our boys know how to do this job; many of our executives have been with the company for more than a decade; they've managed the business through our various ups and downs and they're certainly familiar with what works and what doesn't work. Starting in May we asked our team leaders to return to best practices to redeploy our assets in ways that will allow us to drive operational efficiencies, improve our cash flow and allow the company to reduce its debt. The change at the company has been dramatic. The Members of the Office of the President quickly reoriented the company working with their departments to identify the issues, craft solutions, and begin implementing them quickly. One of the most visible examples is the exceptional job done in executing an amendment to our credit facility with JPMorgan Chase. Like the Board and the Office of the President, our bank understands that InfuSystem continues to have great potential. We've some real bumps but with the right attention we can get the business back on track including generating the strong consistent cash flow that will allow us to service and repay our bank debt as provided in amended credit agreement. Chris Downs led the discussions with JPMorgan Chase and I'll take this moment to thank him. Thanks Chris for your efforts. Over the last few months we've conducted a thorough of the business and it is readily apparent that InfuSystem is not lacking for new business opportunities; both our third-party payer sales force and our direct payer sales force are very active presenting new business opportunities to us on a weekly basis. We expect that this will continue going forward and that the number of procedures utilizing InfuSystem equipment will continue to increase over time. What the company needs to do better however, is to manage its growth and to make sure that new business creates value for shareholders. We do not want growth for growth sake. Along these lines it's a very simple fact that if we don't collect on the bills we send out to customers it doesn't matter how many pumps are deployed or how many procedures are being performed. Improving our billing and collections practices was and is the first priority in returning the company to profitability. And because of the way InfuSystem recognizes revenue improved collections will also help drive future revenue growth. Explained simply, InfuSystem sends out gross billings that are higher than the amounts that will ultimately be collected. What is recognized as revenue in any quarter is calculated as the amount billed modified by a rolling average of historic billings that have been successfully collected. Over the past several quarters InfuSystem's revenues have declined, in part due to a decline in success collecting on historic billings. As we focus on improved collections the historic billing rate will improve and this will impact the calculation resulting in a higher recognized revenue. Even better, since all of the procedures we bill will involve costs associated with the procedures performed, every incremental dollar we collect will increase the company's cash flow, profits and EBITDA. In the second quarter of 2017 the Board and the Office of the President redirected InfuSystem's strategic emphasis away from expanding our pump fleet to drive increased gross billings and toward increasing our effectiveness collecting on the pumps and procedures we already have; with a combination of in-house and outsourced personnel we're starting to see the impact of these efforts; it will take time, as it will take more than a few months of strong collections to change the math involved in calculating our historic collection rate but we plan to stick to it. The first benefit will be increasing cash flows and we'll use that cash to pay down our bank indebtedness. In addition to improving our billing and collection practices challenged the team to find meaningful cost reductions in our operations. The response in this area has been equally impressive. Our G&A expense was essentially flat year-over-year despite approximately 1 million in onetime charges related to severance, charges related to early capital lease repayments and litigation. On the litigation, InfuSystem's has paid the full amount necessary before our insurance kicks in so none of the special charges seen in the second quarter should repeat. And please take note that the G&A cost reductions in the second quarter do not include the substantial savings we have identified and are currently implementing in IT. We leveraged our new Board member Darrell Montgomery and brought in and IT consultant in July that has helped us identify a nearly $1 million in annualized IT cost savings. We will be implementing these changes and you will start to see their impact in the second half of the year. The last thing I would like to comment on before turning the mic over to Chris is the significant reduction in CapEx seen through the first half of the year. As I said earlier our current focus is not on expanding the fleet, it is on getting more from the assets and the business InfuSystem already have. This includes redeploying pumps away from lower margin business when new and better customers are identified. It also means going into the warehouse and pulling pumps of the shelves. Those that concurrently be used are being reconditioned and deployed and those that can't be used are being sold. I'd like to thank John haggerty and his team in Biomedical Engineering for their hard work, Tom Maurice and [Indiscernible] for identifying and executing on the increased pump sales. Since I spoke with you last on May 22nd, InfuSystem has embarked on a process to recalibrate the company, we ran and there is some trouble last year following the CMS change with SE 1609 but the business was never broken. Changes were needed and those changes are being made. We firmly believe that by refocusing our resources and priorities we are heading in the right direction for all of our stakeholders including our customers employees and shareholders. With that said let me Chris Downs after Chris's comments on our financial we will open the call for your questions. Chris?

[Chris Downs:]

Thank you, Greg. For the second quarter of 2017, total net revenues were down 6.5% or approximately $1.2 million to $16.9 million versus the prior year period. This decline is largely attributable to the billing model change for our Medicare patients. Total product sales increased $0.3 million to $2.2 million, an increase of 16% compared to the prior year period. Total net rental revenues were down 9.1% versus prior year to $14.8 million. Gross profit was down 7.2% or $0.8 million versus prior year to $10.3 million resulting in gross margin of 61.0% versus 61.5% in the prior year period. G&A expenses increased less than 1% to $6.4 million compared to the prior year period, despite including approximately $1 million of non-recurring charges related to severance, legal expenses and capital lease termination fees. Operating loss was $1.1 million versus operating profit of $0.4 million in the prior year. Net loss was $1.1 million or $0.05 per diluted share versus income of $0.2 million or $0.01 in the prior year period. Adjusted EBITDA, a non-GAAP financial measure, was 10.0% to $3.1 million versus $3.4 million in the prior-year period, but was up 113% compared to the prior sequential quarter to the first quarter of 2017. Adjusted EBITDA margin decreased slightly from 18.8% in the prior year period to 18.1% in the current quarter, and up 10.7% from 8.1% margin in the first quarter of 2017. Adjusted net loss or non-GAAP financial measure, was $0.4 million or a loss of $0.02 per diluted share. Net debt, total debt net of cash decreased $2.9 million to $32.1 million in the quarter as we focus all of our cash towards repaying our debt. Liquidity at June 30, was $8.6 million consisting of $0.1 million of cash and $8.5 million net availability under our revolver. This is compared to liquidity of March 31, 2017 which was $8.5 million. Our liquidity will be positively impacted going forward by number one, our continued commitment to restrain on capital investment for both pumps and IT; two, our renewed emphasis on cash collections; three, our cost savings initiatives; four, our new reduce required principle payments on the bank term loan under the recent bank amendment which I’ll talk about in a moment; and five, the retirement of the majority of our capital leases which will reduce our near-term quarterly principle payment on capital leases from like over $800,000 per quarter to approximately $150,000 per quarter. Medical equipment and rental service is down on both the gross and net basis again for the -- against both the first quarter of 2017 and yearend 2016 as we take actions to streamline our equipment fleet. On this, we showed during the second quarter that we can do more with less, despite having a smaller fleet we experienced the highest quarterly oncology treatment volume in the history of the company. On June 28, 2017, the company entered into the third amendment to the credit agreement. This amendment includes the comprehensive set of changes to the credit agreement which have been carefully crafted in close consultation with chase bank. It will provide the company with the time to improve operating performance and continue to strictly control capital investment all aimed at enhancing free cash flow to reduce our debt. The major covenant changes, include an increase of our maximum leverage ratio from 2.7 times to 4.0 times, which will then decline overtime as well as a reduction in the minimum fix charge coverage ratio from 1.25 times to 1.15 times with the reversions of the prior levels of 1.25 beginning in the first quarter of 2018. Other major changes including reduction in our quarterly minimum principle payment on the term loan to $570,000 for the remainder of 2017. Prior to this amendment, our quarterly payment was $1.3 million. Additionally, an annual excess cash flow recapture provision was added which is intended to require the company to utilize our excess cash and accumulated during the year to repay our obligations under the credit agreement. Now, with that I’ll return the call to Gregg Lehman, our Executive Chairman.

[Gregg Lehman:]

Thank you, Chris. Victoria or operator, would you please open the lines for Q&A.

[Operator:]

Thank you [Operator Instructions] And our first question comes from Andrew Walker from Rangeley. Please go ahead.

[Andrew Walker:]

Hey, guys. Congrats on -- pretty nice results considering where you guys started [ph] from. Just two quick questions, so obviously the focus is on reducing bad debt expense kind of improving collections. Your quarter-to-date in Q3 have you guys seen kind of continued improvement?

[Gregg Lehman:]

Yes, I think that’s safe to say that our efforts that we started on in earnest in May are going to continue not only through the last half of the year, but continue on into 2018.

[Andrew Walker:]

Okay. Good, that’s great to hear. And could you kind of give a trend through -- so you started the efforts in May. Could you give the trend throughout the quarter April, May, June how kind of collections and bad debts there?

[Gregg Lehman:]

We can give a little visibility to that, I’ll ask Jan to just talk a little bit about the efforts that have been going on in our Madison Heights office. And we don’t usually break things down by the month, but she can give you a little bit of visibility in terms of how that process is working.

[Jan Skonieczny:]

So, as you know beginning in May we put forth an effort to kind of reassess the resources that we had and make sure that we have staff that was fully trained and capable of doing the new roles that they were brought in to do, so since that time we've added some additional staff; we've contracted with some outside resources to assist with some of our aged collections and in addition putting more emphasis on our patient collection. So, I think all things considered that effort will continue not only through the end of the year but on well into next year as we continue to reduce our accounts receivable and improve our cash flow.

[Gregg Lehman:]

I think just to amplify what Jan said, we're having a lot of success, we just outsourced some of our aged collectible receivables just within the last 60 days so, we're just starting to see a little bit of an uptick in that; it'll take time to feather that out probably in the last two quarters, but we're seeing significant progress in collections which is one of our major initiatives; we'll give you a little bit more color as we've better data points in the last two quarters then we've right now.

[Andrew Walker:]

That’s super helpful and fantastic. Obviously, that’s been a concern for a while. So, it's great to hear progress you made on that. And then second question so it seems like the Executive Office going well, do you guys plan to continue running like this for the foreseeable future or is there a search going on for a new CEO as well?

[Gregg Lehman:]

No there's no search going on right now. This is Gregg. We're going to continue running the Office of the President indefinitely at least I would say at a minimum through the end of this fiscal year mainly because it's working so well. And I think it would be more disruptive to go through an executive search right now until we really see we harvest some of these results that we've been working on, so we'll give you obviously updates as we go on but right now it's business as usual with the Office of the President.

[Operator:]

[Operator Instructions] Our next question comes from Bill Gordon from Gordon Capital. Please go ahead.

[Bill Gordon:]

Can you try to age some of the accounts receivable out there in terms of how we're doing with that, just how far behind are we? I'm sorry accounts payable, sorry?

[Chris Downs:]

Just to be clear, is the question on accounts payable or accounts receivable?

[Bill Gordon:]

Payables.

[Chris Downs:]

Payables, no, we're not -- we're not behind. Towards the end of every quarter as every -- as most companies do we slow the outflowing cash a little bit but there was nothing out of the ordinary this quarter. We are literally paying on 30-day terms and -- so that's about where we're at.

[Bill Gordon:]

Okay, so let's try the other side of it, what about getting -- how old is some of the stuff that -- we do?

[Chris Downs:]

On the AR side yes, we don't really talk about the ageing buckets, but it's nothing out of the ordinary.

[Bill Gordon:]

Can you define ordinary?

[Chris Downs:]

In terms of medical collections, you can have really old receivables that you still collect on all the way up to getting paid 30 days later.

[Jan Skonieczny:]

I can just tell you that our DSO is approximately 64 days.

[Bill Gordon:]

64 days.

[Jan Skonieczny:]

That's pretty much in line with our industry.

[Operator:]

[Operator Instructions] And at this time I'm showing no further questions. I'll now turn the call back over to Gregg for closing remarks.

[Gregg Lehman:]

Thank you, Victoria. Again, I want to thank all of you for participating on this call. I want to thank you also for your ongoing support of InfuSystem. We've had an interesting year and a half but I think it's safe to say that we've experienced what the bottom feels like and we're moving out of the trench and getting back on track. I'm in the Madison Heights office today, spent time in the Kansas City office we're doing a lot of employee meetings and I can honestly say that employee morale and optimism is moving in the right direction. So, thanks for your continued support we look forward to giving you updates during the next quarterly release. Thank you, and have great an afternoon.

[Operator:]

Thank you. Ladies and gentlemen and this concludes today’s call. Thank you for participating. You may now disconnect.